By Inflation, geopolitical conflicts, rising artificial intelligence (AI) infrastructure costs, and increasing memory chip prices are forcing businesses to reconsider their budgets. For employees, these decisions can mean another year without a salary increase while the cost of everyday expenses continues to rise.
In October 2026, Zoho founder Sridhar Vembu announced that the company would skip its usual annual salary increases, citing higher server costs, increased AI usage expenses, and geopolitical uncertainty, according to Hindustan Times.
Zoho’s decision raises an important question for employees and employers: Can a company legally freeze annual raises when business costs increase?
For workers in the United States, the answer depends on their employment agreements, applicable wage laws, and the circumstances behind the decision. An employer may generally cancel a discretionary raise, but that does not mean every compensation freeze is lawful.
Why Are Employers Freezing Annual Raises?
Inflation and the Cost of Living
Inflation reduces purchasing power when prices rise faster than income. Employees may spend more on housing, groceries, transportation, insurance, and other necessities without receiving additional compensation.
Employers also face higher operating expenses, including rent, utilities, supplies, and labor costs. When these expenses increase, management may postpone planned salary reviews or reduce discretionary spending.
Consider an employee earning $70,000 annually. If their salary remains unchanged while the prices of the goods and services they purchase rise by 4%, their purchasing power may decline by an equivalent of approximately $2,800 in annual income, assuming their personal expenses rise at the same rate.
However, US federal law does not generally require private employers to provide annual raises that match inflation. Such increases may be required by an employment contract, collective bargaining agreement, or applicable state or local law, but employees do not automatically acquire a legal right to a cost-of-living adjustment every year.
War and Geopolitical Uncertainty
Armed conflicts and geopolitical tensions can disrupt supply chains, increase energy and transportation costs, and create uncertainty in international markets. Businesses that depend on global suppliers may face higher procurement expenses or delays that affect their operations.
Companies may respond by reducing nonessential spending, slowing recruitment, or reviewing compensation budgets. A salary freeze may be one way to limit costs when revenue forecasts become uncertain.
Nevertheless, financial uncertainty does not automatically release an employer from existing contractual obligations. If an employee has a legally enforceable entitlement to a specific salary increase, the employer must assess its obligations under the applicable agreement and law.
AI Infrastructure and Computing Costs
AI adoption can introduce substantial costs for businesses that develop or deploy AI systems. Computing capacity, cloud services, data-center resources, and ongoing usage fees can require significant investment.
Zoho’s announcement provides a relevant example. According to the Hindustan Times report, Vembu cited sharply higher server prices and increased AI usage expenses when explaining the decision to forgo annual salary increases. He also expressed concern about the future of software jobs as AI changes the industry.
AI may affect employment in other ways, too. Companies can reorganize teams, change hiring plans, and revise job responsibilities as automated tools become more capable. These developments may influence workforce planning and compensation decisions.
However, the financial cost of AI does not remove an employer’s existing legal obligations. A company must still honor applicable compensation agreements and comply with wage, discrimination, and retaliation laws.
Rising RAM and Memory Chip Prices
Memory components are another cost pressure for businesses investing in computing infrastructure. Random-access memory (RAM) and other semiconductor products are essential to servers and data centers, making their prices relevant to companies expanding or upgrading their technology systems.
A July 2026 analysis by Deloitte, Why the Memory Chip Crunch Is Greater Than Expected, examined how strong AI demand, supply constraints, and rising memory prices were affecting data-center investment and enterprise budgets.
Higher hardware costs can force technology companies to reconsider investment priorities. However, memory prices should not be treated as a confirmed cause of every salary freeze, including Zoho’s. The reported reasons for Zoho’s decision centered on server costs, AI usage expenses, and geopolitical uncertainty.
Ultimately, rising hardware prices may explain why a company wants to reduce spending, but they do not determine whether its compensation decisions comply with employment law.
Can Employers Legally Freeze Annual Raises in the United States?
Generally, employers can decide not to award discretionary annual raises, provided their decisions comply with applicable laws and existing commitments.
The US Department of Labor explains that the Fair Labor Standards Act (FLSA) does not require employers to provide merit-based raises or increases above the applicable minimum wage. Whether a particular raise is required often depends on the employment arrangement and other applicable legal requirements.
Three situations illustrate the distinction.
Discretionary raises: An employer’s policy states that salary increases are considered annually based on performance, company finances, or management approval. If no increase is guaranteed, the employer may generally decide not to award one, subject to applicable law and other commitments.
Contractually promised raises: An employment agreement or other enforceable arrangement specifies an increase on a particular date or after an employee meets defined conditions. Withholding that increase may create a contractual or wage-payment dispute, depending on the agreement and governing law.
Collective bargaining agreements: Union agreements may establish scheduled pay increases, wage scales, or other compensation requirements. Employers generally must honor applicable negotiated obligations rather than disregard them because operating costs have increased.
The wording of the relevant documents matters. A statement that employees are eligible for an annual review does not necessarily guarantee a raise. Conversely, a specific commitment to increase an employee’s salary may create enforceable rights.
Employees should review their offer letters, employment contracts, compensation policies, and any applicable collective bargaining agreements before concluding that a salary freeze violates the law.
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When Can a Salary Freeze Become Illegal?
A salary freeze is not automatically unlawful. However, the circumstances surrounding the decision can create legal concerns.
Breach of Contract or Unpaid Wages
If an employer has promised a specific salary increase and an employee has satisfied the required conditions, withholding the increase may result in a breach-of-contract or wage claim.
The outcome depends on the agreement’s wording, whether the increase was guaranteed or conditional, and the law governing the employment relationship.
Employees should retain written compensation commitments, salary statements, performance reviews, and relevant communications. These records may help establish whether an enforceable obligation existed.
Discrimination in Compensation Decisions
Employers may have legitimate reasons to freeze raises across their workforce. Problems arise when compensation decisions are based on unlawful discrimination or when the way a policy is implemented violates applicable equal-employment laws.
For example, withholding raises because of an employee’s protected characteristic may create legal liability. Employers should document legitimate business reasons and apply compensation policies consistently.
Retaliation Against Employees
A compensation freeze may require further scrutiny if it follows an employee’s participation in legally protected activity, such as reporting discrimination or exercising certain rights under wage-and-hour laws.
Not every workplace complaint or disagreement about salary is legally protected. However, employers cannot use compensation decisions to unlawfully retaliate against employees for protected conduct.
Minimum Wage and Overtime Violations
A salary freeze does not excuse an employer from complying with minimum-wage and overtime requirements.
Covered, nonexempt employees must continue to receive the wages and overtime pay required by federal law and any more protective state or local laws. Financial pressure, rising AI costs, or declining profitability cannot justify withholding wages that employees have legally earned.
How Can a Salary Freeze Affect Employee Benefits?
The consequences of a salary freeze may extend beyond an employee’s regular paycheck, depending on the terms of their benefit plans.
For example, an employer retirement contribution calculated as a percentage of eligible compensation may be lower than it would have been if the employee had received a raise. Some life insurance and disability benefits may also be linked to salary.
Bonus calculations and other compensation-related benefits may depend on base pay, total compensation, or specific plan formulas. A frozen salary does not automatically reduce these benefits; employees must review the relevant plan documents to determine how their benefits are calculated.
The broader financial impact can also be significant. When household expenses increase but income remains unchanged, employees may have less money available for savings, debt repayment, and retirement contributions.
Employers should communicate whether a salary freeze affects only base pay or also changes other compensation arrangements. Clear explanations can help employees understand their financial position and identify any questions about their contractual rights.
What Should Employees Do If Their Raise Is Canceled?
Employees who learn that a planned salary increase has been canceled should first determine whether the increase was discretionary or promised under an enforceable arrangement.
They can take the following steps:
- Review employment documents. Check the offer letter, employment contract, compensation policy, and any written communication describing the increase.
- Request written clarification. Ask whether the decision is temporary, whether a previously promised increase has been withdrawn, and which employees or compensation arrangements are affected.
- Preserve relevant records. Keep salary statements, performance reviews, compensation announcements, and communications about the original commitment.
- Check applicable laws. Employment protections vary by state and locality. Employees should identify the rules governing their specific employment relationship.
- Consult an employment attorney when necessary. If the employer appears to have withheld promised compensation, discriminated unlawfully, or retaliated against protected conduct, an attorney can assess the available options.
Employees should also distinguish between a canceled opportunity for a future raise and a failure to pay wages already earned. Those situations can involve different legal rights and remedies.
What Employers Should Consider Before Freezing Raises
Employers facing financial pressure should review their compensation obligations before announcing a salary freeze.
They should identify which increases are discretionary and which are required by contracts, collective bargaining agreements, or applicable law. A general company announcement should not be treated as permission to disregard individual commitments.
Employers should also document the business reasons for the decision, apply legitimate policies consistently, and review compensation practices for potential discrimination or retaliation concerns.
Communication is equally important. Employees should understand whether the freeze applies to all workers, whether contractual increases or promotions are affected, and whether the company intends to review the decision later.
Although freezing raises may reduce immediate expenses, it can also affect employee morale, retention, and recruitment. Employers should consider these consequences alongside their short-term financial objectives.
The Bottom Line
Inflation, geopolitical uncertainty, AI infrastructure expenses, and rising memory chip prices can all influence corporate compensation decisions. Zoho’s October 2026 announcement illustrates how several of these pressures can converge in the technology sector.
However, the reason for a salary freeze and its legality are separate questions.
In the United States, employers generally are not required by federal law to provide annual merit raises. Contractual promises, collective bargaining agreements, applicable wage laws, and protections against discrimination and retaliation can limit an employer’s discretion.
Employees should determine whether their expected raise was discretionary or legally promised. Employers should ensure that any compensation freeze respects existing obligations and is implemented lawfully.
A difficult economic environment may justify reviewing a compensation budget, but it does not automatically override employee rights.
The article was written and published by Hazel Isabella, reviewed by Adam Fermin, and last updated on October 14, 2026.